We hear the term business model all the time, but how often do we stop to think about what that really means? Most businesses build the concept into their planning, but a full understanding of what makes up a business, and therefore a revenue model will make any business plan better and make the business more likely to succeed.
Here’s what you need to understand a super business model, and define the one for your startup.
First, we need to start with some definitions that, while you may have heard them before, you may not have put them in context of a business model. We’ll define them briefly in this section and dive deeper after that.
Business to Consumer (B2C): You deliver goods or services directly to customers. Common examples are software, apps, retail both e-commerce and physical, the food service industry, and more.
Business to Business (B2B): This model means your business provides goods and/or services to another business. Many Software as a Service (SaaS) companies like MailChimp, office supply companies, and equipment providers work primarily on a B2B level.
Business to Business to Consumer (B2B2C): The most common companies in this category are media companies or social media companies. They provide content and services and a platform for customers, but they also provide ad space to businesses. Therefore, the business pays the social media company for an ad, and that and other information is delivered to the customer. Think Google, the ads in your search results, and the organic listings.
The Blended Approach: Two of the first companies that come to mind are Apple and Microsoft. Both offer hardware and software to individuals, but both also offer apps and software and even hardware geared toward specific businesses. This is because their products are appropriate for both applications. This is a great business model, because multiple revenue streams are built in.
Revenue and Cashflow: Revenue is the money that pays business expenses and ideally creates a profit. Cashflow is the money you have on hand at any one time to pay for short term operating expenses.
These are quite simplified definitions, but they establish a foundation. Your business model defines where your revenue comes from, and in most cases also determines how much cashflow you need to operate on a regular basis.
Super Business Model Revenue Streams
The most common way to define your business model is to look at where your revenue comes from. Ideally any business will have more than one revenue stream. Where that money comes from defines your business model.
Let’s use a content business and their revenue streams as an example. As we will quickly see, there are several sources of revenue. As an easy example, we’ll look at Hulu.
What are the consumer options with Hulu? Well, the lowest cost to consumer is a subscription model with ads. Why can Hulu offer this at a lower price? Because this is a B2B2C model: the consumer pays a subscription price, which is one source of revenue. But advertisers also pay Hulu to deliver their ads to the consumer during programming, therefore creating a second stream of revenue.
The next level is a subscription model: the consumer pays more, but in exchange they don’t see ads. This model is now more strictly a B2C model: the revenue comes from the customer directly.
The third model involves bundling: Hulu’s parent company Disney also owns other streaming properties, and so to increase revenue overall, it offers a discounted, bundled subscription available in both ad supported versions and an ad free version. The bundle is cheaper than getting all three services, and although profit per platform is lower, the company profit overall is greater.
The point here is to illustrate a business that has a couple of key things:
- Multiple revenue streams from not only multiple apps, but multiple business models.
- Revenue from both businesses and consumers.
- Multiple options to satisfy various types of customers.
But now, let’s break down those revenue streams and apply them to other businesses.
Super Business Model Applications
So we just looked at one content model, streaming shows and movies. But there are aspects to the content model and they can apply to other business models as well. Here are some applications and the kind of model they generally fall into.
Subscriptions: Originally this might look like a content exclusive model, but companies like Dollar Shave Club and Chewy have shown that people will subscribe to pet food and razor deliveries as well. This is a business to consumer (B2C) model in most cases, as the customer is paying for a product or service on a regular basis.
However, it can be B2B as well. Businesses don’t order razors (don’t try to deduct that on your business taxes, trust us), but they do subscribe to software from Microsoft Office to QuickBooks or industry specific software. They also may subscribe to industry publications.
The point is to not get caught up too much that one model or another fits a specific category.
Advertising: This is a simple one. You “share” your space with another business in exchange for money, affiliate payments, or some other compensation. A business will often do this with their software provider, earning more than the cost of their annual service. This is a strict business to business model, as it’s a rare instance when an individual wants to market themselves outside of online dating apps.
Transactions: This can be B2C or B2B, but essentially you are selling something. This can be a one-time purchase (for instance from Chewy) of something that is non-consumable, or that a customer only wants one time. For example, although you may want a new bed, you probably don’t need one every month or even year, so a subscription doesn’t make sense.
That’s the main difference form subscription business models. Transactions are one time or irregular purchases at the customers discretion, rather than a weekly, monthly, or even annual purchase.
Selling Data and Analytics: Careful here. With GDPR and the California Consumer Protection Act, buying and selling consumer data can be a risky proposition for both sides. However, companies who do surveys, gather census data, and bring together other information are still quite viable. Anonymized data is one thing, as are analysis services and programs. This is always a B2B model: while you might want to compare your lawn to your neighbor’s, you probably don’t need a lot of data for that.
Other revenue streams: Maybe your company has archival data, or software or media you can license to others. (Companies like Shutterstock do this with photos). Events and conferences or breaking into the sharing economy are all revenue streams, some B2B or B2C. Some can even be harnessed as B2B2C, like distributing ad flyers with food delivery so you get money from both advertisers and consumers in a single transaction.
Don’t limit your revenue streams or even your business models to the ones above. Innovation is the reason many of them exist, and that others will come into existence.
All this information is not just designed to spark ideas. It is also to help you categorize your business and revenue models. The better you understand where your money is coming from, the better you can target your goods and services to the right people. Your business and marketing plans and even your cashflow planning are all based on this information. A super business model begets a better business plan, which leads to long term success.
What’s your business model? Where is your revenue coming from? Let us know in the comments below. We’d love to hear from you.